Growth and stability in Bitcoin and other cryptocurrencies are only as good as the companies that support these technologies. While Bitcoin, for example, has been lauded as a largely decentralized virtual currency that does not involve a central exchange, the truth is that users will inevitably have to rely on a few companies that offer ancillary services, such as online wallets, payment gateways for merchants, and the like.
Recently, BlockChain.info, a startup that specializes in Bitcoin wallet services, has announced raising a $30.5 million Series A funding round, led by Lightspeed Venture Partners and Wicklow Capital. With 2.3 million consumer wallets, BlockChain is the most popular Bitcoin wallet around, and it promises to make using the cryptocurrency as easy as possible.
This is a good sign for developers, users, miners, and basically the cryptocurrency community in general. Institutional investors tend to prefer investing in ventures that benefit in leveraging a technology, rather than speculating on the value of the instruments being exchanged. While it’s true that several individuals and institutions have seen their net worth grow due to the rapid rise in value of Bitcoin, the cryptocurrency is still very much volatile. Businesses that have potential in earning from Bitcoin transactions, however, show a more stable path to growth.
In the case of BlockChain, having a secure and stable company for handling online Bitcoin wallets will ensure continuity, standardization and ease of access for users, and a foot in the door for merchants who want to partake in the benefits of cryptocurrencies.
Investment in Bitcoin companies — a growing trend?
BlockChain’s series A is the biggest investment in a Bitcoin-related startup, so far, surpassing an earlier funding round raised by BitPay, which raised a $30 million Series A round from a group of investors that include Asian magnate Li Ka Shing, PayPal founder Peter Thiel, Yahoo founder Jerry Yang and Virgin’s Richard Branson. It’s these peripheral investments that tend to generate more value for stakeholders, said John Greenwood of London-based think-tank Invesco, in a statement to the South China Morning Post. He went as far as compare that particular financing round to how “investors in days gone by made more money out of selling shovels and picks to gold-diggers than anyone ever made out of the gold mine.”
To date, about $250 million have been invested in Bitcoin and cryptocurrency related startups. Many of these involve online wallets and exchange systems, while some focus on acting as payment gateways for merchants. Angel List includes 527 Bitcoin startups with an average valuation of $3.8 million, as well as 1,948 investors putting their money into these fledgling companies.
Challenges ahead
It’s not all rosy for Bitcoin startups, however, as many of these companies have to face several technical, regulatory and market challenges to succeed and even survive. Earlier this year, for instance, the New York Department of Financial Services has proposed a set of regulations for companies that deal in Bitcoin. The rules for the so-called “BitLicense” are quite stringent, such as requiring companies to keep funds in trust, share founders’ biometrics and financial information, as well as keep records of clients’ physical addresses.
In some jurisdictions, the use of Bitcoin and cryptocurrency itself has been deemed a criminal act. In China, you can legally use Bitcoin to pay for transactions, although it is illegal to exchange Bitcoin for fiat money, which leads to difficulty in individuals and businesses cashing out the cyber currency. In yet others, laws are being proposed to legalize some form of e-currency, although banning decentralized ones in the process, such as in Ecuador.
These regulations, of course, stem from the negative image that illicit use has brought upon cryptocurrencies. After the dark web Silk Road closure in 2013 and the fall of Mt. Gox (and the attendant story about how its the company allegedly fraudulently acted to jack up the price of Bitcoin), government financial bodies have been cautious in their acceptance of cybercurrencies as valid means of exchange. While some monetary authorities, such as those in the US, the Philippines, admit that cryptocurrencies merit further study, some would outright warn citizens against the dangers of virtual currencues, mostly because of connections with money laundering.
What can help Bitcoin grow?
Bitcoin presents potential among merchants, payment processors and wallet companies, as well as those directly benefiting from mining coins, including miners and device makers. However, those who are into mining and speculation are likely to benefit only in the short run. Bitcoins in circulation are estimated to hit a ceiling sometime 2025, and specialized rigs for mining Bitcoins are becoming ever expensive to procure and build. Firms that produce Bitcoin-mining computers are also on a constant race for faster processors and cheaper production. And with the algorithm becoming exponentially difficult to solve through time, device makers are not able to catch up.
Two things will help Bitcoin gain more mainstream use and acceptance: stability and ease of use.
In its present state, Bitcoin is severly volatile and is easily affected not only by forces of supply and demand, but also externalities like bad publicity (such as country-wide bans and involvement in crime). It would be problematic for ordinary users to hold currency that might suddenly lose value in a short span of time. However, the democratized nature of Bitcoin mining and transaction logging is the very essence of Bitcoin and may be difficult to separate from the currency. The same laws of supply and demand do govern fiat currencies through interest rates, discount rates, inflation and purchasing power, although the effects take much more longer than the sudden rise-and-drop dynamics of Bitcoin’s value.
Meanwhile, startups like BitPay and BlockChain provide services that allow easier access to Bitcoin for both consumers and merchants. Bitcoin wallets are no longer simply proofs-of-concept. Rather, with millions now able to exchange money through purely digital means (and sometimes even through scannable QR codes on paper), it’s a good sign that the community around cryptocurrencies is a healthy one.
Perhaps with these two factors, governments and regulators will be able to take a more accepting stance of Bitcoin and its kin.
